TaxTMI 
TaxTMI 
2026 (6) TMI 1134
X X X X Extracts X X X X
X X X X Extracts X X X X
....led its original return of income on 17.11.2016 declaring total loss at Rs. 28,99,43,954/-. Subsequently the assessee filed revised return on 25.01.2018 declaring total loss at Rs. 27,04,08,372/-. The case of the assessee was selected for complete scrutiny under CASS. Accordingly, statutory notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') was issued and served on the assessee. Subsequently the Assessing Officer issued and served notice u/s 142(1) along with a questionnaire in response to which the assessee filed its reply with supporting documents. 3. During the course of assessment proceedings the Assessing Officer observed from the Balance Sheet and the financial statements of the assessee for the year under consideration that the assessee company has issued 2,00,000 equity shares of face value of Rs. 10 at a premium of Rs. 2,240/- to one M/s. Prathiti Investment Trust on 23.04.2015. Thus, the assessee company has received an amount of Rs. 44,80,00,000/- in the year under consideration as share premium against the allotment of said shares. The assessee company while charging the premium of Rs. 2,240/- per share has adopted the fair market va....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany and more so even when it is start up. Therefore, it is natural and fair to adopt the Discounted Cash Flow method of valuation of share. It was argued that as per Rule 11UA (2) the assessee has an option to value the shares as per the Discounted Cash Flow Method. Therefore, the rule cannot be read in isolation stating that only NAV method is the Fair Value Method for valuing the shares of the company. Without prejudice to the above, it was submitted that Angel investors invest in the companies on the basis of "idea" in these startups, which cannot be valued under any method of valuation other than Discounted Cash Flow methods. Therefore, in this method future cash flows and revenue is estimated on the basis of idea will be successful and accordingly Discounted Cash Flow method is used for the valuation of shares. If the investor is willing to invest in the idea at that value, he is allotted the share. The investors generally conduct their own due diligence before investing in the shares of the company and the fair price to be paid for the investment. It was further submitted that the transaction is genuine. 6. However, the Assessing Officer was not satisfied with the argume....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;t be accurate. It works best only when there is a high degree of confidence about the future cash flows. Further, the method requires a lot of detail to make an estimate of the intrinsic value of a stock, and each of those details requires an assumption. The selection of cash inflow is based on sales forecasts which is in itself an indeterminable element. Another important element of DCF method is the determination of the proper discount rate that should be applied to bring the cash flows back to their present value. The discount rate is generally determined taking into account the factors like risk of the business/project, size of the company, time horizon, debt/equity ratio, real or nominal basis etc. Similarly, assumption of growth rate is also depends on several factors. Therefore, the method requires a large number of assumptions and due to the nature of DCF calculation the method is extremely sensitive to small changes in the discount rate and the growth rate assumption. The other major disadvantage of DCF is that the terminal value comprises far too much of the total value. Even a minor variation in the assumption on terminal year can have a significant impact on the final....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany during the course of assessment proceedings. Therefore, veracity of the said information cannot be ascertained. However, it is crystal clear from the details given in the said para that, the valuation report was prepared by the valuer, only on the basis of information/estimates provided by the management/promoters of the company. d) The para 3 of the valuation report relates to 'exclusions and limitations', which is actually a para of disclaimer clauses. At the beginning of the said para, it has been clarified that, the report, its contents and the results therein are specific to management representation letter dated 26th February, 2015 and the recommendation tendered in the report only represents the valuer's recommendation based upon information furnished by the company and other sources and the said recommendation should be considered to be in the nature of non-binding advice. So far the source of information provided by the assessee company for the purpose of valuation of shares and its reliability is concerned, the report is absolutely silent. It has also been made clear in the report that, the recommendation made in the report are not for anybody to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aluation exercise will partake a nature of arithmetical calculation only. It may be seen from the entire facts of the case and the material available on records that, no such requirements are fulfilled by the assessee company or by the valuer while arriving at the fair value of the shares of the company. It has time and again stated in this order that, the whole exercise of valuation of shares in this case is solely based on the information provided by the company and accuracy of which is not at all verified. Further, no third party information or comparable data was referred to. Similarly, the complete details of the relied upon information and its basis was also not submitted by the assessee before the undersigned. Therefore, the assessee company has clearly failed to substantiate the fair value of the shares @ Rs.2,250/- as on 31.03.2015 with cogent documentary evidences other than by submitting a valuation report, which suffers from several defects. f) At the end of the valuation report, a calculation sheet has been enclosed (Annexure 1), wherein the value per share has been calculated taking into account projections of various figures of next five years. The first fig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asis of details/information provided by the assessee in this regard. The relevant part of the valuation report is reproduced as under: 3.4 In the course of valuation, we were provided with both written and verbal information, including technical and financial data. We have not carried out a due diligence or audit of the Company, nor have we independently investigated or otherwise verified the data provided. We do not imply and it should not be construed that we have verified any of the information provided to us, or that our inquiries could have verified any matter, which a more extensive examination might disclose. We are not responsible for arithmetical accuracy / logical consistency of any financial model or business plan provided by the Company and used in our valuation analysis. Further, in the case of Agro Portfolio Private Ltd. Vs. Income Tax Officer, New Delhi [171 ITD 0074] (ITAT Delhi ), the ITAT has rightly upheld the act of rejection of valuation report given by the merchant banker where the assessee failed to give evidence to support the figures furnished by it to the valuer for obtaining the report and no independent enquiry was caused by merchant ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ib) r.w.s. 2(24)(xvi) of the I. T. Act and added to the total income of the assessee. I am satisfied that, the assessee has furnished inaccurate particulars of its income in this regard, hence, the penalty proceedings u/s 271(1)(c) of the Act are initiated separately. 7. In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer. 8. Aggrieved with such order of the Ld. CIT(A) / NFAC the assessee is in appeal before the Tribunal by raising the following grounds: 1. That the learned CIT(A) erred in law and on facts in confirming the addition of Rs. 44,80,00,000/- made by the Assessing Officer, in respect of premium on allotment of shares, treating the same as the appellant's 'Income from Other Sources', as per the provisions of Sec.56(2)(viib) r.w.s.2(24)(xvi) of the I.T. Act 2. That the learned CIT(A) grievously erred in law and on facts in not taking on record the Written Submissions filed by the Appellant along with the relevant Contents of the Paper Book, filed at the stage of the Video Conferencing held on 26th November, 2024. It is most unfortunate that although the appellant had, in its Paper Book filed before the learned CI....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee and the Assessing Officer cannot reject the valuation made in accordance with the guidelines of Rule 11UA. 11. Referring to the decision of the Hyderabad Bench of the Tribunal in the case of JCIT (OSD) vs. MLR Auto Ltd vide ITA No.115/Hyd/2021 order dated 28.12.2023, he submitted that the Tribunal in the said decision has held that the Assessing Officer was incorrect in concluding that the DCF method is quite unrealistic and inapplicable to the terms of the Income Tax Act. On the contrary the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the fair market value of the unquoted shares. 12. Referring to the decision of the Mumbai Bench of the Tribunal in case of DCIT vs. Credtalpha Alternative Investment Advisors (P.) Ltd. reported in (2022) 94 ITR (Trib) 596 he submitted that the Tribunal in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cuments pertaining to transaction of issuance of shares in response to which those parties have directly given the details to the Assessing Officer confirming the transaction, therefore, neither the identity nor the creditworthiness of the investors nor the genuineness of the transactions can be doubted and therefore, the deeming provisions of section 68 of the Act are not applicable. 16. Referring the decision of the Hon'ble Delhi High Court in the case of PCIT vs. M/s. Cinestaan Entertainment Pvt Ltd reported in (2021) 433 ITR 82 (Del), he submitted that the Hon'ble High Court upheld the decision of the Tribunal where it has been held that when independent investors have invested in shares of a company as per valuation adopted on DCF basis, not only should their commercial prudence come to be doubted, but also the question of tax abuse via infusion of unaccounted money cannot be raised. 17. The Ld. Counsel for the assessee in his third plank of argument submitted that in the assessment year 2017-18 even on squarely identical facts the same Assessing Officer had accepted the DCF valuation after due consideration in the scrutiny assessment. 18. Referring to the show cause ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee company in the impugned assessment year has issued 2,00,000 equity shares of face value of Rs. 10/- at a premium of Rs. 2,240/- per share to one M/s. Pratithi Investment Trust on 23.04.2015 and thus has received an amount of Rs. 45,00,00,000/-. The assessee while charging the premium @ Rs. 2,240/- per share has adopted the fair market value of the shares at Rs. 2,250/- as per the report of the CA wherein the valuation of the shares as on 31.03.2015 of the assessee company was made on the basis of DCF method. According to the Assessing Officer the DCF Method requires a lot of details to make an estimate of the intrinsic value of a stock and in respect of each of those details, the analyst must have high degree of confidence about the assumptions being made of future performance. Otherwise, the fair value generated will not be accurate. According to him, a perusal of the share valuation report prima facie shows that the report is diminutive of several vital requirements and therefore, the report is not worth to be relied upon. He, therefore, proceeded to value the shares ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he case of Agra Portfolio (P.) Ltd. vs PCIT (supra) has held that while it would be open for the Assessing Officer, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. While doing so, the Hon'ble High Court followed the decision of the Hon'ble Bombay High Court in the case of Vodafone M-Pesa Limited vs. PCIT (supra). The relevant observations of the Hon'ble High Court read as under: "15. A perusal of Rule 11UA(2) would indicate that the assessee is enabled to determine the FMV of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determined the FMV as per the DCF Method. 16. In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (o) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ave heard rival submissions on the issue in dispute and perused the material on record. We find that computation of LTCG on the transfer of undertaking as the slump sale consists of two components. First component is sale consideration and the second component is the net worth or cost of acquisition. When the net worth of division is subtracted from the sale consideration, which results into LTCG on the slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/- which was worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that ld Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee." 19. Proceeding along similar lines, the Hyderabad Bench of the ITAT in Joint Commissioner of Income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 94 ITR (Trib) 596 market value" of unquoted shares provisions of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the "options" available to assessee by adopting discounted cash flow method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation i.e., net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on between them, we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed." 25. We find the Hon'ble Gujarat High Court in the case of Akash Ceramics (P.) Ltd. vs. ITO (2024) 168 taxmann.com 407 (Gujarat) has held that where the assessee had exercised option for DCF meth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ertainment (P.) Ltd. vs. ITO reported in (2019) 177 ITD 809 (Delhi-Trib.) has held that as per section 56(2)(viib) read with rule 11UA the assessee has an option to do valuation of shares and determine fair market value either on DCF Method or NAV method, and Assessing Officer cannot examine or substitute his own value in place of value so determined. 28. We find on further appeal by the Revenue, the Hon'ble Delhi High Court in the case of PCIT vs. Cinestaan Entertainment Pvt. Ltd (supra) dismissed the appeal filed by the Revenue by observing as under: "13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of the fair market value as per prescribed methodology. The appellant-Revenue has the option to conduct its own valuation and determine the fair market value on the basis of either the discounted cash flow or net asset value method. The respondent-assessee being a start-up company adopted discounted cash flow method to value its shares. This was car....
X X X X Extracts X X X X
X X X X Extracts X X X X
....luation process. 14. In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law." 29. In view of the above decisions, we hold that since the assessee in the instant case has valued its shares as per Rule 11UA by determining the fair market value on DCF method, therefore, the Assessing Officer in our opinion could not have substituted his own valuation in place of the valuation so determined. 30. We further find the shares issued with premium in the instant case were not subscribed by any closely related person or any sister concern of the assessee but by an independent investor Pratithi Investment Trust managed by Mr. Kris Gopalakrishnan, a highly respected Start-up mentor and one of the founder members of Infosys. Further, the submission of the Ld. Counsel for the assessee that the Assessing Officer had issued notices u/s 133(6) of the Act to the above investor seeking confirmation and relevant information and documents pertaining to transaction of issue of shares in response to which the said investor had directly furnished all the details including ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fore, hold that the Ld. CIT(A) / NFAC was not justified in upholding the action of the Assessing Officer. 32. We, further find for the intervening year assessment year 2017-18 the Assessing Officer has accepted the DCF valuation after due consideration in the scrutiny assessment. A perusal of the show cause notice dated 18.11.2019 issued by the Assessing Officer for assessment year 2017-18, copy of which is placed at pages 127 to 131 of the paper book shows that the Assessing Officer in query No.3 has noted that the assessee has received an amount of Rs. 41,23,30,170/- on account of security premium on shares issued for which he has asked various details. Similarly in clause 3(vi) he has asked the assessee to submit the copy of valuation report and its basis / detailed working in respect of determination of price of shares and to explain as to how the valuation adopted is correct for assessment year 2017-18. We find after considering the various submissions made by the assessee the Assessing Officer has not made any addition in the said assessment year, copy of which is placed at pages 143 to 150 of the paper book. No 263 or 147 proceedings are initiated for assessment year 2017....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppellant requests that leave be granted to add, alter, amend or withdraw any grounds of appeal on or before final hearing of the appeal. 35. Ground of appeal No.1 relates to the order of the Ld. CIT(A) / NFAC in confirming the addition of Rs. 21,48,96,972/- made by the Assessing Officer invoking the provisions of section 56(2)(viib) r.w.s. 2(24)(xvi) and Rule 11UA. 36. After hearing both the sides we find the above ground raised by the assessee is identical to the ground of appeal No.1 in ITA No.2967/PUN/2025. We have already decided the issue and allowed the said ground. Following similar reasonings, we allow the ground of appeal No.1. 37. Ground of appeal No.2 relates to the order of the Ld. CIT(A) / NFAC in confirming the disallowance of Rs. 18,17,690/- made by the Assessing Officer u/s 14A of the Act. 38. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted from the Balance Sheet, Profit and Loss Account and submissions made by the assessee that the assessee during the impugned assessment year has made substantial investment in equity shares. He, therefore, asked the assessee to explain as to why the disallowa....